Divergence Analysis
However, it must be noted that some indicators and oscillators in the support-
ing data series may indicate potential continuation and reversal irrespective
of the direction of price. They also do not require disagreement with price for
non‐confirmation or agreement for confirmation. Some examples of these os-
cillators and indicators include volume bar action, moving average of volume,
open interest, and average true range, where rising peaks and troughs (and
slopes) indicate confirmation, whereas falling peaks and troughs (and slopes)
indicate non‐confirmation, regardless of the direction of price in the main data
series. Only the direction of the supporting data series is relevant and it is the
only determining factor of the potential strength or weakness underlying the
trend. But to determine bullishness or bearishness, the direction of price is still
required.9.2.6 narrow interpretation of Divergence and
Convergence
Whenever the corresponding peaks or troughs between the main and support-
ing data series are moving toward each other, we say that the two data series are
converging on each other. Notice that during convergence, the main and support-
ing data series are moving in opposite directions, as defined in section 9.1.3, and
hence there is non‐confirmation. The illustrations in boxes (4), (7), (8), (13), (16),
and (17) in Figure 9.3 display convergence.
Alternatively, whenever the corresponding peaks or troughs between the main
and supporting data series are moving away from each other, we say that the two
data series are diverging from each other. Referring to Figure 9.3, illustrations
in boxes (2), (3), (6), (11), (12), and (15) display divergence. Notice that during
divergence, as in convergence, the main and supporting data series are moving
in opposing directions indicating non‐confirmation. Therefore we say that both
convergence and divergence exhibit directional discrepancy.
Convergence and divergence have bullish and bearish indications. Conver-
gence of corresponding peaks or troughs between the data series is normally
considered bullish, whereas its divergence is regarded as bearish. This is mainly
attributed to the fact that the direction of the oscillators in the supporting data se-
ries is usually regarded as a prognostication of future price action. Consequently,
rising peaks or troughs in the supporting data series are an indication of potential
strength, and further upside in price is expected regardless of whether there is
non‐confirmation or otherwise. Similarly, falling peaks or troughs in the support-
ing data series are an indication of potential weakness, and further downside in
price is therefore expected.
One question arises, however, when referring to scenarios depicted in boxes
(5) and (14) in Figure 9.3, where no successively higher or lower peaks and
troughs are observed, essentially depicting price traversing sideways. Since di-
vergence or convergence is nonexistent in both scenarios, does that imply con-
firmation? As discussed earlier, confirmation must also indicate a potential for
further price extension or momentum in the direction of the current larger trend.
We observe no divergent or convergent behavior associated with the scenarios